‟In the illiquid summer months, we tend to invest more in defensive stocks.” Source: Source For Alpha

“Small caps are in demand in the first five months of the year”

Author: Dr. Christian Funke, Source For Alpha, and Timo Lüllau

Germany is the engine of the European economy. The German stock market is also likely to continue to rally in the coming months, according to Dr Christian Funke, management board member at the investment boutique Source For Alpha. How to invest successfully in the domestic market can be seen in the management of the S4A Pure Equity Germany fund (DE000A1W8960) .

In an interview with Universal-Investment at the Fondskongress in Mannheim, he explains the investment strategy.

Universal-Investment: Dr Funke, the German stock market ended up turning in a solid rally at the end of 2016. The year 2017 has also started quite auspiciously. How do you expect the German equities market to perform in the coming six to 12 months?

Funke: We are expecting 2017 to be another good year for equities. The German stock market should generate returns of between 7 percent and 10 percent again this year. Of course, we also have to reckon with a few occasional setbacks. However, it must be stated: The German economy continues to boom despite all the negative influences around the world. We also don’t see any reason for this to change in the coming months. The many fears relating to the future policies of US President Donald Trump are already priced into the market. Naturally, the stocks of individual German exporters could experience stronger volatility from time to time, particularly if these companies are very dependent on the USA. But it should be noted that a series of decisions by the US government could be very positive for German industry from an economic perspective. We especially see the planned measures to invest extensively in American infrastructure as a case in point. That should have a positive effect on equity markets.

Universal-Investment: Does your portfolio make use of the entire spectrum of the German stock market? Do you pay attention to company size in your portfolio construction process? What criteria do you use to select the individual securities for your portfolio?

Funke: The investment universe covers all equities in the Dax, MDax, SDax and TecDax. Company size is indirectly important because we change the weightings in the individual investment segments over the course of the calendar year. Empirical analyses have shown that small caps are stronger in the first months of the year. Many investors still have higher risk budgets at the beginning of the year and can therefore stray further from the benchmark with their investments. Small caps benefit from this investment behaviour. In the more illiquid summer months, we tend to invest more in defensive stocks, such as Adidas or Fresenius Medical Care. In the last third of the year, we give Dax blue chips very high weightings. These stocks benefit from the shrinking risk budgets of portfolio managers. Many fund managers also wish to show safe stocks in their books for the end-of-year reporting, giving classic blue chips a boost as well.

Universal-Investment: Where do you see interesting investment opportunities in the German equities market at the moment? How are they reflected in your portfolio?

Funke: We have dedicated ourselves increasingly to investing in spin-offs in recent months. In the US, this is already very established, but it’s still rather unknown in Germany. One good example of this is Uniper, the subsidiary of the energy giant E.ON. Due to the spin-off, investors automatically received Uniper stock in their securities portfolios. After the spin-off, it was sold by many investors because they barely knew the company’s stock. As a result, Uniper was initially undervalued. Over time, the potential of the E.ON subsidiary was increasingly recognised, which caused the stock price to rise significantly. Since we bet on the spin-off from the start, we were able to record a gain of about 30 percent since September from our position in the S4A Pure Equity Germany portfolio. From our perspective, spin-offs offer an interesting return opportunity that we aim to invest in even more in the future. Apart from Uniper stock, we were also very successful last year with securities such as ThyssenKrupp, Hochtief, Stada and Deutsche Post. 

Author: Dr. Christian Funke, Source For Alpha, and Timo Lüllau
Date of issue: 2/21/2017